A common goal in the financial sector is to manage funds in a manner which maximizes upside potential for profit while minimizing the risk of loss of principal. In this regard, index and equity options have been traded as insurance against loss and as a way of reducing one's cost basis. There are many strategies known in the art of options trading including hedges, straddles and collars. A limitation of these strategies has been the prohibitively expensive cost of buying put options to fully hedge an investment from one period to another. Accordingly, a compromise strategy is often taken in which either (i) less than a completely hedged position is taken, thereby exposing the account to downside risk or alternatively, (ii) an investor may opt to forgo some amount of appreciation in the underlying stock position to fund such protection. In either case, hedging strategies utilizing options and other market-neutral philosophies have generally been inefficient from a federal income tax perspective.
What is needed in the art and has heretofore not been available is an effective downside hedging methodology, with the opportunity to maximize upside participation in a tax efficient manner. The present invention provides such benefits and others, and where applicable is effected in a tax efficient manner.